ESG Rules and Regulations Are Box Ticking Efforts for Sustainability. Here’s What CEOs Need to Do Differently

Rajeev Peshawaria
CEO, Stewardship Asia Centre

07 February 2024

Much of the world is slowly recognizing that we need to act urgently to save planet Earth and humanity. It’s widely acknowledged and understood that all sections of society including governments, regulators, businesses, and civil society must collaborate to have a meaningful impact on 21st century challenges like climate change, environmental degradation, socioeconomic inequality and cyber vulnerability.

ESG Has Brought Attention to Challenges, But Its Problematic

Enter ESG, a framework that rose in popularity in the mid-2000’s, and seems to have emerged as the frontrunner to drive business towards addressing the existential challenges we face. In general, it has succeeded in focusing the business world’s attention on doing well by doing good.

However, while the flexibility of the ESG framework provides an overarching language and framework to address environmental and social challenges through business, it has also given rise to several problems.

  • Environment (E), Social Responsibility (S) and Governance (G) are misaligned.While E and S are both existential challenges, G is the mechanism we used to address them. The problem with bundling such different terms is that companies can point to progress in one area, to take attention away from harmful effects in another area. For example, a company may produce an environmentally sustainable product, but also have problematic S issues including child labour usage.
  • Governance (G) is relied upon heavily to address E and S challengesThe G in ESG uses an Incentive→Regulate→Measure→Reward or Punish system to regulate E and S. Regulations and incentives are indeed required, but as we are seeing, they aren’t enough to drive the extent of positive action that is truly needed to address the enormity of climate change and income inequality.

  • The rules and regulations minimize harm. We need to maximize innovation.Regulation encourages most (not all) companies to minimize harm so they can  stay out of trouble. They provide a minimum level of good behavior. What we need today are profitable solutions to environmental and social challenges. For that, we need innovation of the highest order. Innovation can neither be legislated, nor driven by incentives alone.

Companies Must Be Intrinsically Motivated to Be Catalysts of Change

The good news is that there are many companies who are doing well by doing good. And for the most part, they aren’t compromising their profits and are indeed making money while addressing the world’s biggest problems. Let’s call these companies E/S Champions. The difference between the E/S Champions, and those that are simply checking boxes, is a deeply ingrained corporate culture that focuses on leadership, rather than regulations.

Here’s What Every CEO Can Learn from E/S Champions:

  • Create a Long-Lasting Impact Through Proactive Leadership IntentI have observed good and bad leadership in the corporate world for over thirty years. Those that make a meaningful difference through their work do so because of an intrinsic sense of values and purpose. Money and extrinsic rewards are important to all of us, but these are not the main motivators of E/S Champion leaders.

    As leaders, it’s important to clearly define the values of your organization, and create an overarching corporate strategy focused on creating and leaving behind good.
  • Adopt a Stewardship Approach to Leadership
    To address the existential challenges we face today, It’s time for our understanding of leadership to evolve. We need to mature into steward leaders—leaders that see themselves as stewards of planet Earth and humanity. In business, this means benefitting not just shareholders, but a wide variety of stakeholders, society, future generations and the environment. These leaders must have the genuine desire and persistence to create a collective better future.

It is possible to make a profit while addressing the biggest pain points of today’s society—climate change, income inequality, cyber vulnerability and social unrest. It requires high creativity, innovation and resilience that governance (G) alone will not activate. Collectively,we need to motivate more businesses to choose steward leadership so that enough innovation can take place to save us and our planet.